Many options and different account types are used for individuals to save money. The goal of saving money is to increase funds while receiving a decent annual percentage yield (APY) on regular savings and dividend or capital gain payments on invested funds. Most importantly, your short-term or long-term goals usually suggest what type of finance vehicles will be used.
With this blog, I will discuss short-term savings and the two different account types that are similar but have some significant differences. Due to the names, the money market account and the money market fund, people sometimes confuse the two different accounts. So it is crucial to know the differences to determine which is best for you.
What is a Money Market Account (MMA)?
A money market account is a form of a bank savings account but is not considered traditional savings per se. Instead, the money market account has more similarities to a high-yield savings account. Depending on the bank, a minimum balance is required, and high balances can benefit from the highest interest payments.
Bank Product / Risk - Because a money market account is a bank product, it has risk-free deposits, which also make your funds FDIC insured up to $250,000 or the NCUA for credit unions, eliminating the risk of losing money.
Interest Rates - Money market accounts provide higher APY than a typical savings account. The interest rate can fluctuate monthly, but the idea is to ensure you receive higher interest on your money than a regular savings account. Money market accounts are typical use for short-term savings.
Generally, traditional saving accounts offer an APY between 0.01 - 0.05. A money market account in December 2022 can be between 3.00% - 4.25%. Money market accounts can only be purchased at retail banks and also offered through online banks.
Access to Funds - Depending on the particular bank and agreement, you can withdraw money up to six times each month. Some accounts allow up to 9 times a month and make deposits as you see fit. Money market accounts provide checking or ATM card similar to traditional savings.
What is a Money Market Fund (MMF)?
A money market fund, sometimes called a money market mutual fund, is a type of mutual fund that offers a form of stable returns with very low-risk compared to stock market investments. The low-risk concept with the ability to receive stable returns (compound interest) can allow the investment vehicle to be used for short-term savings.
Investment Product / Risk - Money market funds invest money into investment vehicles such as short-term government securities, commercial paper, cash, cash equivalent securities, and other ultra-safe securities. You can buy money market funds from brokerage accounts such as Fidelity, Invesco, Charles Schwab, Vanguard, etc. You also can work with a financial advisor to find money market funds that best fit your situation.
Money market funds aim to preserve capital and are designed to provide very-low risk with the ability to provide liquidity and low cost. However, the fund is an investment; therefore, it carries no guarantee of the principle by the government.
Interest Rates - Money market funds provide higher interest rates than your regular savings accounts. At times, it can also allow your money to grow quicker than some money market accounts because your money is invested into government back short-term securities. Money market funds operate by a 7-day yield which is the average income paid out over the previous seven days assuming interest income is not invested. The higher the 7-day yield, the more interest income is received.
Access to Funds - Like any other investment, securities within the fund must be liquidated when you need cash from the fund. Still, there is typically a same-day settlement without any transaction limits. Depending on the Broker Investment Company, most will have check writing capabilities.
The bottom Line
Both money market accounts and money market funds offer similar saving goals but differ in their approach. The money market account will provide more stability because it is FDIC-insured. Money market funds with very low risk can provide the same savings option with the ability for your money to grow quicker because it is an investment tool. A financial advisor can guide you and assist you with how money market funds can fit into your savings portfolio.
All written content on this site is for information purposes only. Diversification and any strategy discussed do not guarantee against investment losses but are intended to help manage risk and return. Opinions expressed herein are solely those of CWM unless otherwise specifically cited. The material presented is believed to be from reliable sources, and our firm makes no representations of another party's informational accuracy or completeness. All information or ideas provided should be discussed in detail with a financial advisor, accountant, or legal counsel before implementation.